Regulatory Relief Bills Gain Momentum in Congress

WASHINGTON — Community bankers' protests about the burden and reach of regulation may finally be getting through to members of Congress.

The list of bipartisan bills seeking to ease federal rules — on everything from privacy notices to escrow requirements — for small institutions keeps growing, offering the first real chance of passing legislation in seven years.

"If you speak to members they will tell you that, if there is something that can be done on a bipartisan basis, they believe it is a regulatory relief package for community banks," said James Ballentine, the chief lobbyist for the American Bankers Association. "There does not seem to be reservation around that as much as what's going to be included in there."

It is unclear what, if anything, will reach President Obama's desk by yearend. But by some estimates nearly 30 pending bills attempt to ease regulatory burden, and proposals getting the most attention all have support from at least one lawmaker in each party. The latest was a bill announced last week by Sens. Jerry Moran, R-Kan., Jon Tester, D-Mont., and Mark Kirk, R-Ill., that would, among other things, lighten compliance requirements dealing with escrow accounts, the Sarbanes-Oxley Act and the Consumer Financial Protection Bureau's mortgage underwriting rules.

Industry representatives say many of the bills — which in most cases would also benefit credit unions — are targeted enough that they have a shot at escaping prolonged controversy. In one example, a bill sponsored by Rep. Blaine Luetkemeyer, R-Mo., to provide certain exemptions from annual privacy notice requirements passed the House in March by a simple voice vote. (A companion Senate bill is still pending.)

"We're not talking about highly partisan, highly contentious issues here that require weeks of debate," said Camden Fine, the chief executive of the Independent Community Bankers of America. "The bulk of these bills has broad bipartisan support and could probably pass on voice votes or with unanimous consent."

But a serious relief effort will likely face numerous obstacles and potential complications, including competition for sustained attention. For one thing, lawmakers are already locked in to discussing comprehensive housing finance reform, both in terms of replacing the government-sponsored enterprises Fannie Mae and Freddie Mac and modernizing the Federal Housing Administration.

Brian Gardner, an analyst with Keefe, Bruyette & Woods, said the Senate relief package — arriving just before Congress leaves for its August recess — is timed to be considered as an amendment for broader legislation, such as a federal budget overhaul.

"You're looking for that must-pass piece of legislation that's getting in at the end of the year before the session is over," he said.

But he warned other challenges may kill the momentum. One potential complication for a relief bill is how aggressive lawmakers are in drafting final legislation so that it includes more controversial changes, such as dramatic reversals of provisions from Dodd-Frank.

"If other lawmakers try to use it as a vehicle to make other changes to Dodd-Frank, it all collapses," Gardner said. "The final product will have to be narrowly crafted and not loaded up with other things. Once it starts getting loaded up with other Dodd-Frank-related issues, it's dead."

Observers said a final relief bill would also have to be crafted in a way to win support from other sectors besides commercial banks, most notably credit unions, which also stand to gain from the proposed reforms. So far, credit unions say they support many provisions in the current crop of bills.

"We're pleased to see an overall concept of regulatory relief for community institutions, credit unions, etc.," said Brad Thaler, vice president of legislative affairs for the National Association of Federal Credit Unions. "It represents a changing of the debate from just a few years back."

Credit union advocates also indicate they may be willing to support a regulatory relief package even if it lacks credit unions' No. 1 legislative priority: raising current federal limits on member business loans. Rep. Gary Miller, R-Calif., has authored a separate relief package exclusively for credit unions that does not include the higher lending limits.

"We would of course support legislation that included" higher business lending limits "but when we look at balance in terms of regulatory relief we've got to look at: What's in it, how does it benefit us, how do the banks benefit and is that benefit balanced?" said Ryan Donovan, vice president of legislative affairs for the Credit Union National Association. "We're not going to measure it based on: Is the MBL provision in there or not? We know what the score is on that. We're trying to get balanced regulatory relief provisions."

Donovan noted, for example, that current proposals to ease Basel capital requirements for community banks would not affect credit unions, which generally are not covered under Basel. Credit unions would instead benefit, he said, from greater flexibility in how they raise capital.

"Where we get into some troubled waters is when we start talking about Basel relief or capital relief for community banks, in the absence of talking about the capital concerns that face credit unions," Donovan said. "That's where we would take a more critical view of legislation, if it provided significant capital relief for community banks but didn't address the capital concerns for credit unions."

Fine estimated there are 14 separate House bills — and 15 bills in the Senate — dealing with some aspect of community bank regulatory relief.

"Nearly every single one of those bills in both the House and the Senate has bipartisan sponsors," he said.

The Senate legislation unveiled last week by Moran, Tester and Kirk would excuse institutions with less than $1 billion in assets from Sarbanes-Oxley internal-controls requirements. It would also allow more institutions to benefit from a Federal Reserve Board policy allowing small bank holding companies to face lighter capital requirements, raising the asset threshold for firms that qualify to $5 billion from $500 million.

Under the bill, institutions with less than $10 billion in assets would also get a legal safe harbor under the CFPB's "ability-to-repay" rule for mortgages held in portfolio for three years, and would also be exempted from escrow requirements for any first lien mortgage.

"While certain elements of the legislation may face some opposition, on the whole this bill appears to be targeted enough to actually gain traction," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading, LLC.

The package is similar to a House bill that Luetkemeyer has sponsored in addition to his legislation focusing solely on privacy notices. Meanwhile, industry representatives still covet passage of a bipartisan House bill by Reps. Shelley Moore Capito, R-W.Va., and Carolyn Maloney, D-N.Y., meant to ensure the fairness of bank exams. And lawmakers in both parties also support various proposals requiring regulators to study the impact of Basel capital regulations on institutions before finalizing any rules.

"We're hoping all of those things that have been introduced or discussed separately … can be pulled together and make up a real comprehensive regulatory relief bill for community institutions," Ballentine said.

Observers said the various separate proposals will likely have to be merged into a single package offered by the leaders of either the Senate Banking Committee or the House Financial Services Committee before getting serious congressional consideration.

"On the Senate side, [Banking Committee] Chairman [Tim] Johnson and ranking member [Mike] Crapo have been pretty clear that they want to deal with FHA solvency first, and then GSE reform," said Donovan. "But after that, we're going to continue to strongly encourage them to take a look at regulatory relief for community financial institutions."

Rep. Jeb Hensarling, R-Texas, chairman of the House committee, has already started that process in his chamber by including a set of regulatory relief provisions in the GOP-backed GSE bill that the committee passed along party lines last week. Those provisions include delaying the effective date of both Basel III capital requirements and Dodd-Frank mortgage rules for small banks.